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Part 1

Avicorp has a

$10.3

million debt issue outstanding, with a

6.1%

coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at

96%

of par value.

a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return.

b. If Avicorp faces a

40%

tax rate, what is its after-tax cost of debt?

Note: Assume that the firm will always be able to utilize its full interest tax shield.

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Part 1

a. The cost of debt is

enter your response here%

per year.(Round to four decimal places.)

Part 2

b. If Avicorp faces a

40%

tax rate, the after-tax cost of debt is

enter your response here%.